The wheel: cash-secured puts and covered calls
The wheel is usually the first strategy a premium seller learns. Sell a put on a stock you would be glad to own; if it is assigned, own the shares and sell calls on them; when they are called away, start again with a put. Every turn collects premium. It is simple, and its risk is simpler than it looks: it is the stock's.
The cash-secured put
Sell a put below the stock price, with the cash set aside to buy 100 shares at the strike. If the stock stays above the strike, the put expires and you keep the premium. If it ends below, you are assigned and buy the shares at the strike, less the premium already taken: in effect you were paid to wait to buy the stock lower.
cost of shares if assigned = strike − premium received
The covered call
Once you own 100 shares, sell a call above the stock price. If the stock stays below the strike, the call expires and you keep the premium and the shares. If it ends above, the shares are called away at the strike: you keep the premium and the gain up to the strike, and give up anything beyond.
Turning the wheel
- Sell a cash-secured put. Repeat each expiry until assigned.
- Assigned, sell a covered call on the shares. Repeat until called away.
- Called away, go back to step 1.
Many sell calls at or above their cost of the shares, so being called away never locks in a loss; that is a choice with a price, as the next section says.
Picking the strike and the expiry
- Delta: the short leg's delta is roughly its chance of being assigned. Around 0.30 is common: a meaningful premium with about a seven-in-ten chance of expiring worthless. Lower deltas pay less and assign less often.
- Days to expiry: 30 to 45 days catches the fastest part of the decay while leaving time to adjust; weekly options pay more per day but carry more gamma.
- When: premium is richest when implied volatility is high against the stock's own past (IV percentile), but check that it is not only an earnings report coming.
The real risk
A cash-secured put and a covered call have the same shape: limited upside, and the stock's full downside less the premium. The wheel does not change that. If the stock falls 40%, you own it 40% lower, and calls sold above your cost pay little, so the wheel stalls while you wait. If it rallies hard, the calls cap your gain and you buy back in higher. In a strong market a wheel often trails simply holding the shares; its appeal is a steadier ride and income in a flat one. Choose stocks you would hold anyway, and size each so that owning 100 shares is comfortable.
In Options Meerkat
The strategy templates (n on a symbol's detail page) build a covered call or a cash-secured put at the money, which ← and → move to another strike, and the P/L page gives its premium, breakeven, and chance of profit. The backtest page (R, on Pro) runs the wheel over a stock's past, on its real daily option prices: the wheel preset, or csp and covered-call alone, at the delta and days to expiry you set, with take-profit and stop-loss exits, against buying and holding the stock. See backtesting an options strategy for how it is run.